Ryan, Brady are 'BAT-ty' to support border adjustment tax

March 10, 2017

By Rick Wolenberg, CEO, Learning Resources

Speaker of the House Paul Ryan’s proposed border adjustment tax has been condemned by a wide range of industries. Importers and small businesses are screaming about taxes exceeding earnings under the plan. Our family business develops its educational toys here, but makes them overseas and will be hammered by the bill.

Despite the strong resistance, House Republicans relentlessly push for this tax on imports.

I wonder how clearly House leadership thought this through. What if Ryan and Ways and Means Committee Chair Kevin Brady, R-Texas., get their way and the border adjustment tax reform bill goes to the Senate for approval? What happens if the BAT becomes law?

Be careful what you wish for.

Republicans plan to use the Senate "reconciliation" process to pass tax reform with a majority vote to avoid the risk of a Democratic filibuster. For technical reasons, the Obamacare repeal must come first, and a 2018 budget must be fashioned and passed. The tax bill itself also must pass "dynamic scoring" at the Joint Committee on Taxation. This all takes time.

When tax reform finally arrives sometime in the summer, House members will already be gearing up for midterm elections. Tax reform will be a big factor in the election, just like the repeal of Obamacare. Will members vote to raise taxes on importers? Importers are a big constituency in every congressional district, employing tens of thousands. Taxes and healthcare may decide the midterms.

This is high stakes poker, and the precedent is worrisome. In 1994, the House passed an energy bill, known as the "BTU tax" under pressure from President Clinton, only to see the bill die in the Senate. Democrats lost the House in the 1994 midterms as voters took revenge. This is known as "getting BTU’d." It seems likely that importers will respond if the border adjustment tax plan moves forward.

Will House members be insulated from voter rage if Ryan’s plan gets through the Senate and is signed into law? House Republicans should fear this outcome, too. Economists promise the BAT will push the dollar up. As a result, exporters may see revenues shrivel as American goods are priced out of the market. The BAT tax break on exports won’t be worth much if there aren’t any exports.

Compounding taxpayer misery, importers will be forced to impose huge price increases. Price increases will be a survival strategy and won’t be matched by wage increases, squeezing consumers. Importers are also likely to cut spending and lay off workers. A recession could easily result. Wildly inequitable tax bills will hit companies; the lucky ones will pay nothing on high earnings, while others will face unconscionable tax burdens.

And who will be blamed for this? House Republicans should think this through.

It won’t stop there. The BAT likely violates World Trade Organization rules and will trigger a response from other countries. While pundits expect a WTO lawsuit decided over years, retaliation is much more likely. The BAT double taxes imports from other countries and eliminates taxes on our exports. Our trading partners may decide two can play at this game. What if they also impose a BAT? Dueling self-destruction will follow.

Voters may ask themselves whether we needed this trade war. The U.S. economy seemed to be recovering nicely without the BAT. As job losses mount and prices rise, House Republicans might find it hard to defend that "yes" vote and get re-elected.

House Republicans made this misery themselves. To right the ship, they need to drop the BAT and find another way to make the U.S. more attractive to businesses.

Perhaps they should start by cutting spending in a meaningful way to pay for lower taxes. The voters might applaud this common-sense approach. Voters may not be as forgiving of the parade of horribles that a border adjustment tax would bring.

Rick Woldenberg is chief executive of Learning Resources, an educational toy company based in Vernon Hills. The company employs 150 people in the U.S. and overseas.